Editorial: California leads all states in public debt

The Golden State continues to lead the nation in accumulating public debt, a race where being in first place isn't the same thing as winning. "California again trumped other states with a $617 billion debt," reported State Budget Solutions, a nonpartisan organization advocating "fundamental reforms" for state budgets.

For the third consecutive year, the organization calculated each state's total debt. The $4.1 trillion tab for all 50 states includes regular debt, 2013 fiscal year budget deficits, outstanding loans to unemployment trust funds, unfunded post-employment benefits and unfunded pension liabilities.

California's share, $617 billion, is more than twice that of the next-most indebted state, the annual report said.

Gov. Jerry Brown's Proposition 30 would slightly reduce the debt load. It would impose $8.6 billion in higher income taxes on the state's top earners and a four-year, quarter-cent increase in what already is the nation's highest state sales tax.

We would argue to the governor that California's debt isn't caused by lack of revenue. It's from lack of spending restraint and over-extending to provide for unaffordable benefits and services. Over-reliance on income taxes exacerbates the volatility that makes California budget projections worthless.

"California has repeatedly overestimated revenue inflows during difficult economic times – and underestimated them during periods of economic growth," writes Arthur B. Laffer, author of "Eureka! How to Fix California," published by the Pacific Research Institute. Since 1981-82, "the state's budget experts have hardly ever gotten it right."

"The Legislature tried to make up for the loss by raising income and sales taxes in 2009," Mr. Laffer writes. "Now, with the stock market failing to produce the capital gains – and the tax revenue – officials were hoping for, most politicians across the state, including Gov. Brown, are again supporting a proposition to raise tax rates."

Last week, an independent group of fiscal experts said the infamous "wall of debt" Mr. Brown said he inherited when he took office last year is several times larger than he thought. State Budget Crisis Task Force researchers "found a lot of other debts that did not turn up in California's official tally," the New York Times reported. "Much of it involved irrevocable promises to provide pensions to public workers, health care for retirees, the cost of delayed highway maintenance and an estimated $40 billion bill to bring drinking water up to federal standards."

There were unpaid bills from previous years including $8 billion in delayed payments to schools and community colleges, and $250 million raided from a fund dedicated to transportation but treated as ordinary revenue, said the report, prepared in collaboration with California Forward, a nonprofit, nonpartisan organization seeking improved governance and fiscal affairs.

By whatever measure, it seems clear. California is living beyond its means. The Register's Editorial Board agrees with Mr. Laffer that ratcheting up taxes worsens economic conditions. Ironically, a corrective step was proposed by Mr. Brown when he ran unsuccessfully for president in 1992 – a flat tax.

Mr. Laffer notes that for 20 years, rising tax rates tended to push people from California. "During the extraordinarily high tax year of 1994, for example, about 450,000 people fled the state," he said. "Many of them moved to Colorado, where voters had just approved a constitutional amendment that severely restricted the state's power to raise taxes."

To prevent further outmigration and accompanying tax-base deterioration, "state leaders should throw out the current tax structure and replace it with a flat tax," Mr. Laffer said. We agree.

A single tax rate for individual taxpayers and businesses could ensure no one is punished disproportionately when income rises. People would be less likely to underreport income or move out of state. A flat tax also could end California's "yearly revenue roller-coaster, where the stock price of the latest IPO makes or breaks the state budget," as Mr. Laffer put it.

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